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Home›Albania Lending›Mortgage lenders must increase the volume

Mortgage lenders must increase the volume

By Blake G. Keller
May 11, 2021
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The dynamics of mortgage business are unfolding at high speed. It might not always be fun to watch, but investors shouldn’t shy away from it just yet.

It has long been known that high margins in the mortgage industry stimulate intense competition, especially when rising rates dampen some demand for refinancing. So, while the profitability of mortgage lenders reached incredible levels last year, it is not surprising that the reaction is also fierce this year.

For the first quarter, initiators such as Rocket Cos. and UWM Holdings have reported declines in a key measure of what they earn when granting and selling mortgages, known as selling profit margins. These margins reflect both market spreads and the pricing decisions of originators. Rocket and UWM headed for even lower levels in the next quarter. Investors seem to have been surprised by the pace of this trend: shares of both companies have fallen more than 15% so far in May.

These margins have a certain context. Rocket expects its overall profit margin on the sale to fall from around 3.7% in the first quarter to less than 3%, with the margin on loans issued with partners, such as brokers, to around 1%. UWM, which focuses entirely on brokers, said its margin of around 2.2% in the first quarter could drop to 1.1% or less. These are still levels high enough for businesses to be profitable and this is nothing new for brokers accustomed to past cycles. Selling profit margins also tend to stabilize after hitting lows.

So, for now, a really key metric will be volume, both from an overall market perspective and whether attractive prices for partners like brokers will help companies gain share as they outlive their competitors with weaker balance sheets and less efficient cost bases.

Rocket forecasts a decline in volume for the second quarter, to closed loan volumes of between $ 82.5 billion and $ 87.5 billion, from $ 103.5 billion in the first quarter. UWM predicts a slight increase in volume, from $ 51 billion to $ 55 billion in the second quarter, from just under $ 50 billion in the first quarter. This in part reflects their relative mix of mortgage types: Rocket has a much larger refinance volume which is much more closely tied to the level of rates and is expected to decline starting in 2020.

Both companies say they expect the buying market to be much stronger and suggest they could see big numbers in it. Rocket said it expects a record quarterly buying volume for itself in the second quarter, and UWM said it could hit its own all-time buying highs in the second or third quarter.

So for investors looking for a possible upside when these stocks fall, this is where it can come from. Rocket noted that the tight constraints on supply recently mean that he has many borrowers with clearances to buy homes but have not yet done so; stocks and seasonal strength could be important factors. UWM is expanding its loan categories to its broker partners, such as jumbo mortgages, to capture even more of their volume and help them capture more of the buying market as a whole.

In a market with many expensive stocks, especially in loans, mortgage originators are now showing multiples of 10 times or less on their 2022 earnings. This is something investors need to watch out for.

The US mortgage market involves some key players who play an important role in the process. Here’s what investors need to understand and what risks they take when investing in the industry. WSJ’s Telis Demos explains. Photo credit: Martin Barraud / Getty Images

Write to Telis demos at [email protected]

Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the print edition of May 12, 2021 under the title “Mortgage lenders need more volume”.



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